Freight charges or rates refer to the costs associated with transporting goods from one location to another using various modes of transportation. These various modes of transportation include ships, rails, roads and air.

While some charges are common to all modes of transportation, others are specific to certain modes. The freight rate is levied at the time of booking, during transit or at the time of delivery.
The freight companies include the breakup of freight charges. For instance, in air freight cases, the breakup of freight rate is included in the airway bill; for ocean freight, it is included in the bill of lading.

Also Read: Cost, Insurance and Freight in Marine Insurance

There are various types of freight charges that businesses must consider when shipping goods. Understanding these charges is essential for accurate cost estimation, invoicing and negotiation with logistics partners. Some of the common types of freight charges are:

Consignee Collect

In this type of freight charge, the consignee is responsible for paying the freight charges. The consignee is basically the buyer of the goods. Under this arrangement, the carrier collects payment from the consignee before releasing the shipment.

Prepay and Add Charges

This is another type of freight charge where the consignor is responsible for paying freight charges. The consignor is the party who is responsible for shipping the goods. However, the consignor later collects the charges from the respective party or customer.

FOB Destination Charges

Free On Board (FOB) destination means the seller is responsible for the goods until they reach the buyer’s location. This includes the cost of freight and handling.

Risk and ownership transfer to the buyer only when goods arrive at their destination. The seller covers the freight and assumes risk during transport.

FOB Origin Charges

With FOB Origin, the responsibility and risk for the goods as soon as they leave the seller’s location is on the buyer. The buyer also pays the freight charges directly or arranges their shipping.

Freight Prepaid and FOB Origin

This is a hybrid model. The seller prepays the freight charges; however, since the shipment is FOB Origin, the buyer assumes ownership of the goods and takes on the risk once the shipment leaves the seller’s location. The seller pays the freight charges, but the buyer takes ownership at the origin.

FOB Destination Charges and Freight Collect

In this arrangement, the buyer assumes responsibility for freight charges, but the ownership of the goods transfers only upon delivery at the buyer’s location. Although the buyer pays the freight, the seller bears the risk until the goods reach the destination.

Cash on Delivery

Under this term, the carrier collects payment for the goods and, in some cases, the freight charges upon delivery.

Only after receiving the payment does the carrier release the goods to the buyer. This is common when buyers and sellers do not have established credit terms in place.

FOB Destination, Freight Collect and Allow

Under this type of freight charge, the consignee is responsible for paying all the costs associated with the shipment of goods. The consignee is also responsible for any associated risks related to the shipment of goods.

FOB Origin, Prepaid Freight and Chargebook

With this setup, the seller prepays the freight charges, but since it is FOB Origin, the buyer assumes ownership and risk at the point of shipment. Later, the seller charges the buyer back for the freight cost, typically through invoicing.

Also Read: FOB in Marine Insurance

The freight charges are broken down into various essential components. These components include:

Base Freight Rate

The base freight rate is the cost of transporting goods from one location to another. The base freight rate is also influenced by various factors, such as:

• Shipping Route and Distance - The longer the shipping route or distance between the place of origin and destination, the higher the base freight rate will be.
• Container Type - Another factor that determines the base freight rate is the type of container. For instance, a full container load is generally considered for bulk shipment and also offers a better base freight rate.

Surcharges and Additional Fees

There are various other surcharges, and additional fees are also associated with the freight shipping cost, which affects the value. These charges are:

• Fuel Adjustment - The fuel adjustment, also known as BAF (Bunker Adjustment Factor), is a variable used to adjust for changing fuel prices.
• Currency Adjustment - Another key component of freight chargers is the currency adjustment, which accounts for the changes in exchange rates.
• Terminal Handling Charges - The terminal handling charges encompass the costs associated with loading and unloading containers at ports.
• Security Fees - Another crucial component of freight charges is the security fee, which accounts for compliance with international port security measures.
• Peak Season Surcharge - This component of freight charges applies during periods of high demand, such as holidays.

Port Fees and Custom Duties

Another key component of freight shipping rates is port fees and customs duties. The port fees vary from port to port. It generally includes inspection charges, cargo handling and storage. Furthermore, the customs duties depend on the cargo's declared value and type.

Haulage Charges

The haulage charges are another key component of freight rates. This charge is applied when goods have arrived at the port. They need to be transported to their final location. The haulage charges include the merchant haulage or carrier haulage charges.

Insurance Costs

The insurance cost is another component of freight charges. It is optional but highly recommended during transit, as it protects the shipment from damage, theft and other risks.

The premium of the insurance is generally calculated based on the declared value of the cargo.

Calculating the container freight rates or cargo shipping rates depends on the various components. Knowing all about these components will help in avoiding unexpected expenses. Here is the simplified formula for calculating container freight rates.

The full container load (FCL) is calculated per container, while the Less Than Container Load (LCL) is calculated based on the weight or volume of cargo, whichever is greater. Let us understand the formula for calculating both.

Full Container Load Calculation

Total Cost = Freight Rate Per Container + Port Fees + Surcharges + Haulage Charges + Insurance

Less Than Container Load Calculation

Total Cost = (Weight or Volume of Container * Freight Rate) + Port Fees + Surcharges + Haulage + Insurance

There are various factors that can influence freight charges and rates. Let us examine these factors in detail.

Distance

Distance is one of the important factors that affects freight rates. The longer the distance of transportation of goods, the higher the freight charges will be. This is due to the fact that covering such a distance requires more fuel, labour, etc.

Transportation Methods

Another factor that affects the cost of freight is the method of transportation. There are various types of transportation methods, including road, sea and air. The transportation method that takes the shortest time to reach the destination generally has the highest rate.

Shipment Weight and Size

The shipment weight and size also influence the freight rates. The heavier the shipment, the higher the freight rates will be. This is due to the fact that heavier shipments take up more space.

Delivery Speed

The speed of delivery is directly related to the freight rates. The shipment that takes fewer hours to get delivered generally has a higher freight rate compared to the shipment that takes longer to deliver.

The freight rates can be easily reduced by simply adopting effective and practical strategies. These strategies are:

Learn About Incoterms

Incoterms are essential terms in the trade and shipping business, as they outline the responsibilities of both the buyer and the seller. Understanding incoterms can help avoid unnecessary costs. It helps in determining responsibilities during the shipping process.

Consolidate Shipment

Another way to reduce container freight rates is to consolidate multiple smaller shipments into a single large shipment. This helps avoid the costs associated with multiple shipments.

Choose Right Freight Forwarding Software

Choosing the right freight forwarding software can help streamline the logistic process. This can be done by comparing the rates, shipment tracking process and more. It will help in making sure that you are not overcharged during the shipping process.

Plan in Advance

Timing is an essential factor in the shipping process. Booking the shipment well in advance can help secure better rates. However, booking the shipment at the last minute will result in higher rates.

Negotiate with Freight Forwarders

If you have been in the shipping and logistics business for some time, it is best to work with a freight forwarder that offers the most competitive rates. Many companies offer discounts and concessions to their regular customers.

Understanding all about the shipping freight rates is crucial for smooth shipping operations. The freight charges can be overwhelming and complex, as they involve various components.

However, businesses can avoid unexpected and hefty shipping costs by learning about these components, such as base freight rates, haulage charges and other relevant factors. Additionally, insurance costs are another crucial factor in determining freight rates.

By investing in marine insurance plans, businesses can protect their shipment from damage or loss during transit. Marine and cargo insurance from TATA AIG is designed to protect goods against various unforeseen circumstances that may occur during transit. With our marine insurance online, businesses will get quick access to coverage.

From Shop Insurance and Theft Coverage to Worker Compensation and Fire Protection, TATA AIG’s small business insurance plans offer comprehensive protection to keep your business secure from every angle.